Exam 11: Investment Center Performance Evaluation

Brooks Beverage Company produces bottled drinks.Division #1 acquires the water,adds carbonation,and sells it in bulk quantities to Division # 2 of Spring Waters and to outside buyers.Division # 2 buys carbonated water in bulk,adds flavoring,bottles it,and sells it.Last year,Division #1 produced 1,600,000 gallons,of which it sold 1,400,000 gallons to the Division # 2 and the remaining 200,000 gallons to outsiders for $0.35 per gallon.Division #2 processed the 1,400,000 gallons,which it sold for $1,500,000.Division #1's variable costs were $420,000 and its fixed costs were $115,000.The Division # 2 incurred an additional variable cost of $300,000 and $180,000 of fixed costs.Both divisions operated below capacity. Required: a.Prepare division income statements assuming the transfer price is at the external market price of $0.35 per gallon. b.Repeat part a.assuming a negotiated transfer price of $0.25 per gallon is used. c.Respond to the statement: "The choice of a particular transfer price is immaterial to the company as a whole."

How is EVA (economic value added)calculated?

Colonial Computing Systems Colonial Computing Systems manufactures and sells various computer products and has two decentralized divisions: (1)Production and (2)Marketing.The Marketing Division has always purchased a particular mouse from Production at $50 per unit.The Production Division is considering raising the price to $60 per unit.The Production Division's costs related to the mouse production is as follows: The Marketing Division handles the promotion and distribution of the mouse purchases from the Production Division and sells each mouse for $100.Marketing Division incurs monthly fixed costs of $5,000.Marketing Division sells 1,500 units per month.Marketing Division can buy the same mouse from outside suppliers for $60.If the Marketing Division purchases the mouse from outside suppliers,the facilities the Production Division uses to manufacture the mouse would remain idle. Refer to Colonial Computing Systems.The Production Division is operating at maximum capacity because of strong worldwide demand for the product.What should be the mouse transfer price between the Production Division and Marketing Division in order for Colonial to optimize profits?

If the investment turnover ratio increased by 30% and the profit margin percentage increased by 20%,what would happen to the divisional ROI?

What are the transfer pricing issues and methods?

When measuring a division's operating costs,labor used in the division's production is

Which of the following is a disadvantage of decentralization?

When measuring divisional operating costs,direct versus indirect refers to whether

The following information relates to the operating performance of two divisions of Sound Machine,Inc. ,for last year. Required: a.Compute the return on investment (ROI)of each division,using total assets at gross book value as the investment base. b.Compute the ROI of each division,using total assets net of accumulated depreciation (net book value)as the investment base. c.Which of the two measures do you think gives the better indication of operating performance? Explain your reasoning.

Is there an optimal transfer pricing policy that dominates all others?

Which statement is true concerning economic value added (EVA)?

Which of the following defines Economic value added (EVA)?

Which statement is true concerning the establishment of transfer prices?

Which of the following is the correct calculation of economic value added (EVA)?

How do you calculate economic value added (EVA)and how is it used?

What is generally considered the best transfer pricing basis when there is a competitive market for the product and market prices are readily available?

Which of the following is a transfer pricing system that provides the selling division with a profit but charges the buying division with costs only?

To encourage division managers to act in ways consistent with organizational goals,divisional planning and control systems attempt to create

Which of the following is(are)the transfer price that would leave the selling division no worse off if the good is sold to an internal division?

If a division has sales of $2,500,000,operating profit of $250,000,and a division investment of $1,250,000,its return on investment is